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HMRC internal manual

# Calculating the amount of security: the quantum calculation - VAT/Environmental taxes: estimating future revenue risk using payments information on file

The most accurate method of estimating the future revenue risk is to refer to the most recent returns on file.

The first step in the formula for arriving at the amount of security requires us to estimate the future revenue at risk in

• 3 months if the person makes quarterly returns
• 1 month if the person makes monthly returns.

The second step in the formula requires us to estimate the future revenue at risk in the 3 months it would take HMRC to wind up the person’s business.

Where we have up to date return and payment information on file the first two steps will normally be the total of

• the two previous returns on file where a person makes quarterly returns
• the four previous returns on file where the person makes monthly returns.

Example - quarterly filer

 VAT returns Net tax due 05/10 £10,000 08/10 £15,000 Total £25,000 = 6 months’ tax

The amount of security required if the person makes quarterly returns is £25,000 before we add any debt they may have.

You must always allow a person who makes quarterly returns to pay the lower amount of security and make monthly returns. You will do this when you serve a Notice of Requirement to give security (NOR), see SG41200.

Example - quarterly filer opts to make monthly returns

Net tax due as above

£25,000 x 4 = £16,667 = 4 months’ tax

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The amount of security required if the same person opts to make monthly returns is the lower amount of £16,667 before we add any debt they may have.

If the person’s most recent returns are not indicative of their usual trading pattern you may use older returns in your calculation. Remember that you must be able to defend your calculation at tribunal if the person appeals, see SG70200.

If the person is a seasonal trader who suspends trading for part of the year you should take an average of returns over a longer period, for example, over 12 months.

Alternatively, if the person’s previous business was of a similar size and type to their current business you can look at tax declared on returns rendered by the previous business.

If you use a first or last period return remember to take account of the length of the accounting period. You calculate 6 months’ or 4 months’ liability as shown above.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000) (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

It is essential that you keep a written record of how you came to your decision on the amount of security. This will be invaluable if the person appeals to tribunal or requests a review.

Remember that you must be able to defend your calculation at tribunal if the person appeals.

If you do not have up to date payment and return information you will have to use taxable turnover information to arrive at an amount of security that is reasonable and proportionate to the revenue at risk, see SG32300.